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Some years ago, I was talking with a very good equity trader, and we started to discuss a certain stock. To my surprise, he told me he had sold it. My question was "Why?"
His answer: “It wasn’t acting right!”
It reminded me of an old poker cliché: You have to know when to hold ‘em and when to fold ‘em.
Many investors enjoy researching a stock and then buying it. There is a kind of exhilaration in making a new investment. However, that is only half the trade. The stock still has to be sold. Sometimes it works out well. Other times, you have to admit you were wrong and sell. The quicker you can spot your mistake, the better it is. Then you can get on with the next trade.
So, how can you tell when your stock is acting right or not?
Three key technical tools can help:
The general rule is: If you are going long, your stock is “acting right ” if it shows a rising trend of higher prices accompanied by expanding volume. This means there is steady demand for your stock. When your stock is pulling back in price (and it will), there should be an overall contraction in volume.
A Bar Chart
eSignal subscribers can pick up on this by looking at a basic bar chart. One of the hottest stocks this year is Intercontinental Exchange Inc. (ICE). The company provides an electronic global futures and OTC marketplace.
ICE is a good example of a stock that has “acted right ”. It broke out from a base at 40 in January and showed a perfect pattern of rising on expanding volume and pulling back on contracting volume on a daily basis. It acted right as it climbed to 70 by March.
The company is showing strong earnings. This year, analysts see profits climbing 58 percent to $1.55 a share from 98 cents a year ago. Going out to 2007, earnings should rise 33 percent to $2.06 a share.
Technical Indicator
The second tool you can use is a classic technical indicator such as the accumulation / distribution line. This is one of several basic charting tools provided by eSignal. The accumulation / distribution line can be plotted on a stock chart.
In the case of ICE, its accumulation / distribution line remained in a solid uptrend until it broke down in late March. One way to interpret the AD line would be to draw a simple trend line under the lows. A breakdown below the trend line would be a sell signal. The on-balance volume indictor would give one the same look too. There are also other indicators.
Time and Sales Report
A third way to see if your stock is acting right is a study of the tape action via the daily time and sales report provided via eSignal. It comes with a long and a short view. The key here is to look for significant big blocks that cross the tape during the day.
If a stock is acting right, many of the big blocks will cross on an up-tick from the prior price or within a sequence started by an up-tick. If there is subtle distribution going on, one can spot it by studying the tape and looking for big block trades that go off on down ticks.
Obviously, a very large big block trade that crossed on a big down-tick in price is a big warning signal of distribution. One of the tricks of the trade is that a stock will often come under distribution because the overall price trend may still be up. So, a study of the daily time and sales can turn out to be a great lead indicator -- an early warning system.
Also, you should study the time and sales report very carefully when you initiate a trade, say, at a particular breakout point from a stock’s base. Most investors are not inclined to sell a stock after they have recently bought it. However, a smart investor does not get lured into that. If the stock acts right, you keep it. If it acts bearishly, you sell it. How long you have held the stock has no bearing on your decision.
Other nuances you can study will also help you to see if a stock is acting right, such as its response to news and general stock market conditions. With experience and watchfulness, over time, you can generate a good feel for each stock.
Also, you should keep a log of your trades and notes on why you bought and sold. This can be very helpful. Review it and learn from your mistakes and reinforce your understanding of good trades.
Note: The charts in this article were captured from eSignal. To find out more about how you can get streaming, real-time quotes from all the markets, plus streaming charts, news and Market Depth, go to: www.esignal.com. |
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